Regulating Luxury

Regulations and conventional wisdom incentivize developers to build luxury, and it is hurting Miami’s future.

On December 7th, 2016, the Miami Planning and Zoning Department unanimously recommended a change to the Miami comprehensive plan to give a double density bonus to projects that offer a specific mix in market rate and workforce housing. The plan applies to specific neighborhoods where mixed-use exists and transit is available. One reason for the unanimous vote may have come from a report showing that 47% of Miami’s affordable housing stock is set to expire in 2017, potentially leaving many in the city without a housing option. This would force people to have to leave Miami for cheaper markets, and more job opportunities. The city expects this new ordinance to incentivize 40% of future housing stock to be mixed-income, primarily in the urban core.

Brickell View Terrace is one of Miami’s first Mixed-Income Housing projects

There are a plethora of articles and studies showing Miami as one of the most unaffordable housing markets in the US. Recently, an 11 city study by NYU’s Furman Center ranked Miami the least affordable to an average renter of the cities included. While other markets may have more expensive housing, Miami’s median income to median housing cost gap is larger than even San Francisco, Los Angeles, and New York. In order to be a resilient city that works for everyone, affordability is a necessity and is a major problem affecting our city today.

The first question that came to my mind was: Why does the free market in Miami not create an incentive to build mid-market housing? Maybe it does, but I believe that the incentive to build luxury condo buildings is simply much higher. The structure of lending deals incentivizes large down payments. A large part of this is usually paid by pre-sale condo units who have to put as much as 50% down to secure their spot. An average local buyer cannot afford this, so developers look to international buyers to secure their projects. While many of these units become investment units for these buyers and cycle back into the market as secondary sales and rental units, the inability for Miamians to be part of the primary market is a hindrance to growth and prosperity. If ordinary citizens cannot buy these units that have the highest potential to appreciate, they cannot build up equity and wealth for their families and inject that back into the local economy. Therefore, the current incentive structure is hurting our local housing market and is an opportunity that both city officials and developers must look into.

Liberty City Square, built in the mid-20th Cen., is a relic of housing projects of the past

The argument against regulatory practices and incentives is that it limits the free market, however, the market as it stands is a complicated mess of banking conventions, zoning boards, state building regulations, comprehensive land use plans, and business risk analyses. No city exists in a vacuum, and the barrier to entry to be a developer is very high. The luxury projects are seen as low risk and high reward. A developer can only execute so many projects in a year, and the incentive to build for luxury, even in downturn markets, is still high. I believe that there are many ways to aim at lower-income residents while also being profitable, and different incentive structures by the city can help to catalyze these.

There appears to be an untapped market for new construction mid-market homes, and the supply has been steadily decreasing (see diagram below). If all of this data, demand, and low supply are still not enough to get companies to build in this space, more is needed to help to create a city whose ecosystem is good for all, and more must be done.

We live in a society that understands incentives, not mandates. The density incentive is in the right vein both politically and pragmatically. Politically, it is not a mandate and does not create a hindrance on developers who want to create projects that make fiscal sense. Pragmatically, it creates a huge incentive for builders to consider it as an option, and I believe many will come to the conclusion that creating mixed-income projects is both good for business and good for Miami.